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Trying to Time the Market Is Dumb, and This Table Proves It

This is why buy-and-hold investors are so successful over the long run.

February was a month of firsts for the iconic Dow Jones Industrial Average(DJINDICES:^DJI). It was the first time we witnessed the Dow drop by more than 1,000 points in a single trading session; and the index ultimately produced three of the eight worst single-day point declines in its nearly 122-year history. It shed 1,175 points on Feb. 5, tumbled 1,033 points on Feb. 8, and dropped 666 points on Feb. 2.

Considering how steady the index's climb had been for two years, the magnitude of these moves was a real eye-opener for investors. In fact, money-flow data from The Wall Street Journal in February shows that $59.5 billion moved out of the Dow's market sectors, as measured by downtick volume relative to uptick volume. It would certainly appear that quite a few investors were spooked by the swiftness of the latest stock market correction (i.e., a minimum 10% move lower from recent highs).

Image source: Getty Images.

Trying to time the market is futile

Yet investors who are essentially riding things out on the sidelines in the hope of correctly timing the market's drop could be in for a rude awakening.

The truth of the matter is that timing the stock market's short-term pops and drops with any consistency over the long run -- i.e., correctly selling when you believe the market is at a near-term peak, and buying back in when you believe it's at a near-term bottom -- just isn't doable. In fact, trying to time the market is plain dumb, and I have some data to prove it.

Below, you'll see a side-by-side comparison of the Dow Jones Industrial Average's 20 best and 20 worst single-day point performances. The green columns on the left denote its best days, while the ominous red columns on the right highlight those days investors would prefer to bury their heads under their pillows.

Data source: Wikipedia and The Wall Street Journal. Table by author.

But see those yellow highlights in the date columns? Each of those marks an instance where a top-20 gain or decline occurred within two weeks of a top-20 move in the opposite direction. As an example, the Feb. 2, Feb. 5, and Feb. 8 declines are the Dow's eighth-worst, worst, and second-worst declines, respectively, in history. However, they occurred remarkably close to Feb. 6 and Feb. 12, which saw the Dow climb by a respective 567 and 410 points, which is good enough for its fourth- and 19th-biggest single-day point gains of all time.

In total, 11 of the 20 highest single-day point gains have occurred within two weeks of at least one of the index's 20 largest single-day point declines. Meanwhile, 14 of the Dow's top 20 single-day point losses have occurred within two weeks of one of its top 20 biggest single-day gains.

Miss the market's best days and you'll regret it

What happens if you miss one of the market's best days? The short answer: You give up a lot of long-term appreciation potential.

Back in 2016, a report from J.P. Morgan Asset Management titled "Staying Invested During Volatile Markets" examined the broad-based S&P 500's (SNPINDEX:^GSPC) best and worst single-day performances over a 20-year period between Jan. 3, 1995, and Dec. 31, 2014. The report found that investors who held over the entire period -- more than 5,000 trading days -- would have made 555%, or an average of 9.9% per year. Notably, this period includes the Great Recession and the dot-com bubble.

Image source: Getty Images.

What happened if investors missed just 10 of the biggest single-day gains? The answer is their return was more than halved to just 191%. If they missed a little over 30 of the best trading days over this 20-year period, all of their gains were wiped out.

Now, here's what really stood out among this data: A majority of the S&P 500's biggest gains came within two weeks of its biggest losses. This isn't a trend that's isolated to the Dow. Therefore, if you sold your stocks and ran to the sidelines at the first sign of trouble, there's a really good chance you missed out on some of the market's biggest single-day gains, and potentially compromised your long-term returns.

Perhaps most important is the fact that, with the exception of the current correction, all 35 stock market corrections totaling at least 10%, when rounded, since 1950 have been completely erased by a bull market rally. In other words, high-quality stocks tend to gain value over time -- so you have virtually nothing to worry about when corrections strike.

Sean Williams has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Author

A Fool since 2010, and a graduate from UC San Diego with a B.A. in Economics, Sean specializes in the healthcare sector and investment planning. You'll often find him writing about Obamacare, marijuana, drug and device development, Social Security, taxes, retirement issues and general macroeconomic topics of interest. Follow @TMFUltraLong